ELECTION 2008: THE FINANCIAL CRISIS

Change, meet crisis

November 06, 2008|Michael A. Hiltzik | Vartabedian and Hiltzik are Times staff writers.

Barack Obama was elected with a mandate for economic change on a scale that hasn't been seen in decades.

So what does he do with it?

During two years of campaigning, Obama set forth detailed proposals for tax relief and enhanced government benefits for the middle class, the poor, college-bound students and the elderly.

He called for new government investments in infrastructure and "green" technologies, as well as a dramatic expansion of health insurance largely by making a Medicare-style program available to all.

He now faces a challenge familiar to every other newly elected political leader: how to transform ideas tailored to win votes into something suitable for the real world.

For The Record Los Angeles Times Thursday, November 13, 2008 Home Edition Main News Part A Page 2 National Desk 3 inches; 105 words Type of Material: Correction Presidents and the economy: An article in Section A on Nov. 6 about the financial crisis included a chart showing U.S. financial performance under various presidents. A column labeled "U.S. deficit or surplus" should instead have been labeled "increase or decrease in deficit." Here are the amounts by which the deficit went up or down during the terms of these presidents: Kennedy, up $1.4 billion; Johnson, up $20.4 billion; Nixon, down $19 billion; Ford, up $67.6 billion; Carter, up $0.1 billion; Reagan, up $81.4 billion; George H. W. Bush, up $135.2 billion; Clinton, down $527.3 billion; George W. Bush, to the present, up $691.7 billion.

And he will almost certainly have to adapt some of his proposals to accommodate the current financial and economic crisis.

The urgency for action was underscored by another sharp drop in stocks Wednesday, with the Dow Jones industrial average plunging 486 points, or 5%. That brings its decline on the year to more than 31%.

"Obviously the agenda's been taken over by economic conditions," said James K. Galbraith, a professor of finance at the University of Texas and an economic advisor to the president-elect. "There's no reason to think these are going away in six months."

But insiders say Obama may have to mediate between opposing camps on his own economic team. Moderates are cautioning against stimulus efforts that might sharply increase the budget deficit, while others are urging the kinds of aggressive measures associated with President Franklin Roosevelt. During the depths of the Depression, FDR implemented a wide-ranging public works program, aid for farmers and homeowners, and social welfare programs such as Social Security.

The recessionary economy, and the expense of the government's financial rescue program, will undoubtedly complicate Obama's efforts to implement his economic plan. But some advisors say he won't be inclined to abandon his key goals.

"It would be very difficult to come in and say, 'That agenda I've been pursuing for a year and a half? Never mind it,' " Jared Bernstein of the liberal Economic Policy Institute said during an interview with The Times last week.

But Bernstein, a key Obama economic advisor, acknowledged that some economic issues may have to be addressed with greater urgency to provide a foundation for others.

"We can't tackle healthcare until we get the economy working," he said. "If the economy is weak, how can you make good on the promises you made?"

Other proposals, by contrast, may move to the front burner. Obama proposed a national infrastructure reinvestment bank to be funded with $60 billion in federal money over 10 years. But congressional leaders have said they may incorporate as much as $150 billion of infrastructure spending in an economic stimulus package that may be enacted before the end of this year.

Such a program is known to be favored by former Treasury Secretary Robert E. Rubin, perhaps Obama's most influential economic advisor, on the grounds that it would have a more lasting effect than simply handing out rebate checks to taxpayers.

That's especially so if the program is designed to make grants to state and local governments that already have bridge repairs, highway improvements and other local projects on the drawing board.

On the stump and in campaign material, Obama laid out an economic program focused on government investment and on strengthening the financial safety net for the poor and middle class.

In addition to the infrastructure bank, Obama proposed investing $150 billion over 10 years in alternative energy by doubling federal research and development funding and providing job training and tax credits for that field.

He also proposed to provide college tuition assistance in the form of a tax credit of up to $4,000 and an expansion of Pell Grants, which aid low-income students.

Obama made the elimination of President Bush's tax cuts for upper-income taxpayers a centerpiece of his campaign, proposing to restore the top marginal tax rate to the Clinton-era 39.6% from the current 35%. The tax cuts are scheduled to expire in 2010, but Republican presidential candidate Sen. John McCain proposed making them permanent.

Obama has also proposed a tax credit of as much as $1,000 aimed at low- and middle-income households, eliminating income taxes for taxpayers older than 65 earning less than $50,000 a year, and raising the federal minimum wage to $9.50 an hour by 2011 and indexing it to inflation (it is currently scheduled to rise to $7.25 by 2009).

He also plans to strengthen protection for union organizing by fighting state right-to-work laws and employer efforts to classify permanent employees as "independent contractors." The latter is often a device to avoid paying health and pension benefits.